The Indian rupee slid to its lowest in over six weeks as the dollar strengthened and oil prices remained high.
The rupee fell as much as 1% on Thursday afternoon to trade below the 74 per U.S. dollar mark. The drop was in line with other Asian currencies, which reacted to a stronger dollar.
Overnight, the U.S. dollar index rose to above 91 and stayed strong in Asian trade at close to 91.66. The strength in the dollar followed the U.S. Federal Reserve's overnight decision. While the Fed maintained a status quo on rates and on its bond buying programme, the dot plot released alongside suggested an expectation of two rate hikes in 2023.
Asian currencies are weaker by anywhere between 0.5% to 1% against the U.S. dollar in response to the Federal Reserve's commentary and projections, IFA Global said in a note on Thursday.
The Indian rupee was the second-worst performer among Asian currencies on Thursday. The Korean won led losses with a 1.2% drop.
Other factors are playing a role as well, said Madhavi Arora, economist at Emkay Global. For one, crude oil prices are holding above $72 per barrel. In addition, the Reserve Bank of India's stance on accumulation of forex reserves may also be negative for the rupee.
This comes in conjunction with RBI's reiteration of its forex stance in yesterday's bulletin, where it indicated that forex reserves are still not adequate enough when seen in the light of cross country comparison ratios, high net international investment position of (-)12.9% of GDP and random shocks amid heightened global uncertainty -- all of it implying that RBI's tactical intervention in forex markets will be biased towards dollar purchases, keeping the rupee subdued and an EM underperformer even in case of healthy EM flows.Madhavi Arora, Economist, Emkay Global
In a paper released as part of the monthly bulletin, the RBI said while foreign exchange reserves provide cushions against unforeseen external shocks, levels are often deceptive. “A better gauge of external vulnerability is an assessment of specific indicators.”
Foreign exchange reserves surged to $605 billion in the week to June 4.
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